Choosing the right individuals within your China organizationPart 1 - Investigating the positions

Part of the structuring procedure of your China company is choosing

the right individuals within your organization to fulfil the roles required

by the Chinese government. This article will explain the positions

and the roles and responsibilities associated with each position.

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Shareholder

For a Wholly Foreign Owned Enterprise / Foreign Invested Commercial Enterprise (WFOE/FICE), the shareholder(s) represents the highest level of authority of the Chinese company. The shareholder outlines the objective and overall company operations.

Board of Directors (Executive Director)

The Board of Directors or Executive Director executes and outlines the operational flow to achieve the objective set forth by the Shareholder. The Board of Directors should have no less than three directors appointed by the Shareholder or alternatively only 1 director which is then named as Executive Director.

For a Joint Venture structure, the Board of Directors are the highest-level of authority as they are made-up of individuals from each party.

The mandate for the Directors or the Executive Director shall not exceed three years. However, they can be re-appointed. The Board of Directors or the Executive Director are indebted to the Shareholder and shall execute the following functions (as outlined in the Articles of Association of the China Company):

Convening the Shareholders´ meeting and report to the Shareholders;

Executing the Shareholders´ resolutions;

Working out the corporate strategy and the company’s investment plans;

Working out the company’s annual financial budget plans and final accounting plans;

Working out the company’s profit distribution plans and loss recovery plans;

Working out the company’s plans on the increase or decrease of the registered capital and/or the total investment amount, as well as on the issuance of corporate bonds;

Working out the company’s M&A plans concerning possible divisions, dissolutions or liquidations of the company as well as the change of the company’s legal form;

Making decisions on the establishment of the company’s internal management departments;

Appointing and dismissing the General Manager and determining his remuneration as well as upon the General Manager’s recommendation appointing and dismissing the other Senior Management Personnel and determining their remunerations;

Working out the basic rules and policies of the company;

Other responsibilities as stipulated by the Shareholder(s) in the Articles of Association.

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Legal Representative / Chief Representative

Every business established in China, foreign or domestic, is required to designate a legal representative for a WFOE/FICE and a chief representative for a Representative Office (RO) (use legal representative from now on). This person is appointed by the Shareholder. Usually it is by default that this individual is the Chairman of the Board of Directors or alternatively the Executive Director.

The Legal Representative is the person responsible for performing the duties and powers on behalf of a company. This person is, based on their role, one of the most powerful people in a foreign invested entity. This power does come with responsibility - if a single individual in a foreign invested company is to be held accountable for company actions, that person is more than likely going to be the legal representative.

In addition, in certain situations, the Legal Representative may also bear significant responsibilities for the acts and omissions of the WFOE/FICE. For instance, in accordance with the Article 49 of the General Principles of the Civil Law of the People’s Republic of China, the WFOE/FICE should stay liable and its Legal Representative may additionally be sentenced with administrative sanctions or penalties if any of the following circumstances are applicable. If the offence constitutes a crime, criminal responsibility shall be investigated in accordance to the law:

Conducting illegal operations beyond the range approved and registered by the registration authority;

Concealing facts from the registration and tax authorities and practicing fraud;

Secretly withdrawing funds or hiding property to evade the repayment of debts;

Disposing of property without authorization after the enterprise has been dissolved, disbanded or declared bankrupt;

Failing to apply for registration or not making a public announcement promptly in case the enterprise undergoes substantial changes or closes completely, which can cause heavy losses to the people invested in the company;

Engaging in other activities prohibited by law, damaging the interests of the state or the public interest.

The qualifications of the Legal Representative

In case of the Legal Representative having any of the below situations applicable to the candidate, the company should consult the registration authorities to change the Legal Representative. Otherwise the Business License of the China company may be revoked by the government authorities in Charge.

Having limited civil capacity;

Having previous criminal records or criminal restrictions which are enforced;

Being pursued by the police or the security bureau;

Less than 5 years passed since serving a criminal sentence convicted for committing bribery, other property crimes or crime of disturbing social economical order; or other crimes; or less than 5 years since serving the sentence of depriving of political rights;

Less than 3 years passed since the completion of a liquidation of a bankrupt company, in which he/she did not only have the position of the Legal Representative, Director or Manager, but also held personal responsibility for the bankruptcy;

Less than 3 years passed since the Business License of a company, in which he/she held position of the Legal Representative, was revoked;

Bearing large amount of personal debts and those debts are not paid off;

Other situations stipulated by relevant laws or the State Council, which lead to the situation that the person is not allowed to hold the position of the Legal Representative

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General Manager

The general manager is responsible for the day-to-day company operations. This position may be concurrently filled by the executive director or a board member. The China company should have one General Manager with a mandate of three years. The General Manager however, should execute the following functions and powers (as outlined in the Articles of Association):

Supervising the production and business operations of the company and implement the resolutions of the Board or the Executive Director;

Formulating plans on the establishment of the company’s internal management departments;

Drafting the company’s basic management system;

Drafting the company’s specific policies;

Proposing the appointment or dismissal of the company’s Deputy Manager(s) and Financial Manager(s);

Deciding on the appointment or dismissal of Executive Personnel other than those whose appointment or dismissal is to be decided by the Board or Executive Director; and

Any other function or power authorized by the Board or Executive Director.

Supervisor

Foreign Invested Companies must have a minimum of one supervisor to oversee the execution of company duties by the director(s) and senior management personnel. To ensure there is no conflict of interest, the appointed Supervisor cannot hold any other positions within the corporate structure, such as being a board member, executive director, legal representative or general manager. For larger companies, a board of supervisors composed of no less than three members is required. The mandate of a Supervisor should be three years with the possibility of re-appointment. The Board of Supervisors or the Supervisor(s) of a company should have the following functions and responsibilities:

Inspecting the financial affairs of the company;

Supervising the performance and duties of the Directors and the Senior Managers and proposing the removal of any Director or Senior Manager who violates any law, administrative regulation, the Articles of Association or any resolution of the Shareholders’ meetings;

Requiring any Director or Senior Managers to take corrective action if his/her actions damage the interests of the company;

Proposing the convention of interim Shareholders’ meetings and disclose any misbehavior at which the Board of Directors/Executive Director has not exercised its functions prescribed by law;

Putting forward proposals at Shareholders’ meetings;

Initiating lawsuits against a Director or Senior Management; and

Any other function or power specified in the Articles of Association.

The above-mentioned positions are a summary of the management structure that needs to be appointed for the company establishment process. The Shareholder(s) may consider adding additional restrictions on these positions and this will be highlighted within the Articles of Association of the Company on order to protect the Shareholder(s) interests fully.

As is true of so many things related to China, creating the right foundation at commencement will virtually always be cheaper and better for you in the long run. There are numerous stories to share of individuals within the corporate structure who have “gone rogue” because of a bad management structure. Those situations are nearly always very difficult and very expensive and oftentimes downright ugly to resolve. The key to solving these potential issues is choosing the right individuals from day one and knowing that changes to the corporate structure can occur (hence having termination letters signed in advance).

DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.